Complexity, technology, agility and quick, decisive action are words and phrases we all hear at industry trade shows, seminars and conferences. The wholesale distribution sector is no different.
“Facing the Forces of Change: Decisive Actions for an Uncertain Economy” is a new wholesale distribution research study from the National Association of Wholesaler Distributors (NAW). The study, written by Guy Blissett, IBM’s New York-based wholesale distribution lead, sums up the situation.
Blissett writes: “Given the lingering uncertainty in the economy, wholesaler-distributors must continue to take decisive actions that will position their companies for growth and prosperity. Gone are the days of overly cautious and slow decision-making processes. The business world is moving too fast, and wholesaler-distributors must be informed, intelligent and nimble enough to make rapid but prudent decisions, and then adjust and iterate as necessary.”
In a phone interview, Blissett said: “Wholesale distribution is a very challenging industry to capture with broad brushstrokes. To my mind, there’s no wholesale distribution industry. Each [vertical] has different components and supply chain and macroeconomic dynamics. If you’re talking about building materials in the Southeast, there’s a different set of challenges and issues than an industrial manufacturer in the Midwest.
“That said, some dynamics do cut across most lines of trade,” adds Blissett. “There’s tremendous pressure on pricing that distributors realize from customers. There are commodity price pressures. In some cases, they’re caught between customers who don’t want to pay more and suppliers who want to increase prices because commodity prices are up.”
As catalogs and geographies expand, customer demand increases. As we have seen recently, events on the other side of the globe can have a dramatic effect. “Who would have thought a tidal wave in Japan would affect auto parts in Dearborn, Mich.?” Blissett says. “It’s just more complex across the board.”
The Consolidation Conundrum
Consolidations, mergers and acquisitions are adding to the complexity, says David Johnston, senior vice president for supply chain at JDA Software in Scottsdale, Ariz. “Consolidation is creating more complex supply chain and distribution networks. Some distributors are making investments to deal with complexity, striving to hold down inventory and cut time to market.”
The complexity also hits the vital transportation link of the supply chain, especially in commodity prices and fuel. Distributors are focusing on better technology to optimize freight movements, often by contracting for fuel, rather than spot buying to lock in more favorable rates.
“Buy at a lower price and sell at a little higher price,” Johnston says. “It’s a bit of a challenge. Theoretically, all cost synergies gained are passed on to customers.”
How do you fight back against the consolidation tide? Industries such as pharmaceuticals and electronics are merging, and when they do, they look to cut down the number of suppliers. Distributors with many categories are more likely to survive.
Even huge distribution companies like Grainger, for example, are broadening their portfolios. “We’re seeing that across the board with portfolios and geographical coverage,” says Blissett. “Distributors are rushing into things like safety, janitorial services, the environmental areas like wind, solar, recyclables and lighting. They can talk to customers at a deep level.
“I also see distributors pushing to much more integrated areas,” he adds, “such as taking over procurement functions. That’s very new, but I’m hearing more of it. They put a person onsite and manage the spend in certain categories.”
While distribution giants like Grainger simply add to their portfolios, smaller organizations may have to join the consolidation movement themselves, JDA’s Johnston says. “Medium-sized distributors have growth in their designs. The time is ripe for independents to do some consolidation. They’re looking for that first step. Wholesale distributors are in a real race toward consolidation. The real strong players out there run like a medium-sized company but realize they have to make investments for platform technology and growth.”
There are problems that technology can solve, or at least make it easier to find the answers. Which customer or supplier is most profitable? What behavioral changes can we make to change that? What are their ordering patterns, number of deliveries? Technology can give greater insight to the customer.
“At the base level, we’re talking visibility,” Blissett says, “transparency into the supply chain. [You need to] give executives the ability to see where the product is, how much of it there is and where the hiccups are in the supply chain. You can now get visibility to what’s happening with customer vendor managed inventory (VMI) or customer managed inventory. You can see what products come off the shelf on a real-time basis. You can make more decisions about replenishment, and you can get a view of cost-to-serve and cost-to-carry.”
Warehouse management systems are helping. They increase the efficiency of pick and put-away. Even the smaller distributors, Blissett says, are thinking about voice picking.
“And it’s not huge yet, but Cloud and software-as-a-service (SaaS) are starting to change and allow smaller distributors to get access to technology that they couldn’t afford. I project out five or 10 years as they embrace the technology more and provide a more level field for these small distributors.”
Technology also helps distributors manage price volatility, says JDA’s Johnston.
“If you get a notice about an upcoming price change, you can let the system tell the optimum quantity to be bought to level it out,” he explains. “If you buy a case at $100 and it increases to $110, you might buy X number at $100 and sell it to customers at $110 after the increase occurs. If you buy too much and it sits in inventory too long, you use up capital. It’s all a mathematical formula to mask all that behind the scenes.”
That challenge extends into transportation, again because of higher oil prices, Johnston says. “There are fewer trucks available, so capacity is down. Demand has gone up, but the supply of trucks has shrunk. Carriers are raising rates because of that and fuel prices. It’s tougher to manage freight successfully, so distributors need to find more optimum transportation solutions. One way is for two or three suppliers to use one truck from Point A to Point B. How do you load up the truck to cover the least distance and number of stops?”
Johnston says that distributors need to do two things for success: planning how they will grow and finding a way to move from tactical to a strategic planning view.
“Their vision has to include measuring a higher level of complexity,” he says. “Wholesalers today think, ‘If I do a good job on my next order, if I maximize freight, I’ll win.’ They don’t think about how to look at their decisions in context with a buy the next time, the next time and the time after that.
“Then, how do they architect their organization to move from tactical to more strategic planning? Some of our wholesalers will reach out and say, ‘Find us a supply chain VP. Help us develop a supply chain over the next couple of years.’”
Adds Blissett: “In today’s environment, there’s lots of attention, no matter what is being distributed. There’s greater focus on efficiency in the supply chain and all facets of the business. It has prompted distributors to think more analytically — apply a more sophisticated, complex analytical lens to their business to squeeze out an additional quest for efficiency.”
One way they’re doing it is by moving into other revenue-generating areas. For the most part, says Blissett, that’s services.
“They’re finding ways to offer additional services to their customers — vendor managed inventory, customer managed inventory, integrated supply inventory. They’ll continue to focus on them as a source of revenue and profit. Not everyone has figured out how. In some cases the customer is unwilling to pay for it; in some cases, they’re not willing to pay enough to cover the cost. Sometimes you don’t have to make money on services, but on the product pull-through, additional volume or other services. Hopefully, you’ll reduce customer turnover.”